A Big Thumbs-Up for Emulex

According to a Form 4 filing with the SEC earlier this week, the hedge funds run by billionaire Paul Singer have upped their stakes in the tech company Emulex (ELX). Singer serves as CEO of Elliott Management, which oversees the hedge funds Elliott Associates and Elliott International. He founded Elliott in 1977 with $1.3 million from family and friends.

Elliott Associates primarily operates as an activist investor, taking significant stakes in companies in order to effect change and unlock shareholder value. Now it appears Elliott sees an opportunity to unlock value in Emulex: It owns 6.07 million shares of the company, according to the Form 4, while Elliott Associates owns 3.27 million shares. That makes for a total of 9.34 million shares, an increase of more than 50% from the funds' position in early October, and just over 10% of Emulex's shares outstanding.

Emulex is currently trading relatively flat for the year, having risen more than 50% during the first quarter. A slowing global economy has been the biggest headwind for the company, with stock declines coming mainly on reduced information-technology budgets among corporations and governments. The two behemoths of the semiconductor industry include Intel (INTC) -- one of billionaire Ken Fisher's seven high-dividend picks -- and IBM (IBM). Both of these also seen slowing enterprise demand.

Despite a nearly-50% decline in Emulex's second-largest business, storage products, last quarter the company still managed to grow revenue 1% from the prior year. It also posted earnings per share above consensus -- $0.19, compared with the $0.15 estimates.

Given that various products within this division are near the end of their lifecycles, the company is now considered to be in turnaround mode. EPS growth over the last five years has averaged at negative 5%, but forward-looking earnings estimates expect growth of at least 5% a year.

We see the backing of Elliott's as a positive -- one that ensures management will maintain a high ability to navigate an ever-changing tech industry. Compared with other tech competitors, Emulex's forward price-to-earnings ratio is well below the industry average at 8x, which suggests the market is over-discounting Emulex's ability to ramp up earnings next year.

Elliott's share purchases here came as it was selling off shares of one of Emulex's competitors, Brocade (BRCD). That latter firm looks to grow in the data-storage market, including increases via the adoption of cloud computing. At 18x earnings, Brocade shares may have gotten too rich for Elliott -- after all, Cisco (CSCO) and Extreme Networks (EXTR) trade at a 12x multiple.

Another major competitor is Marvell (MRVL), which could likewise be worth a look. The stock, one of billionaire David Einhorn's latest stock picks, trades at 13x trailing earnings and a mere 11x forward earnings. The shares appear to have some over-discounted growth prospects, as well, trading at a P/E to growth (PEG) ratio of 1.2.

We believe Elliott's strong commitment to Emulex, now at more than 10% of the tech company's shares, is a positive. We are also impressed with Emulex's ability to effectively navigate its rapidly declining storage products division. It is definitely a stock to consider for your portfolio.